On being Sharīʿah compliant in equity investments: impact of investment horizon andmarket volatility

Abstract

Purpose This paper aims to undertake a comprehensive comparative analysis of Sharīʿah-compliant equity investments (SCEIs) and their non-Sharīʿah counterparts, in India, conditioning for investment horizon and market volatility. Indirectly, it also investigates for time varying performance of SCEIs, and explicitly analyses the unsystematic risk and related adequacy of returns. Design/methodology/approach Testing for statistical significance of differences in risks and returns; analysing portfolio performance using conventional metrics, information ratio, and Jensen's Alpha; Estimating returns due to stock selection and market timing using Fama’s Net Selectivity and Treynor and Mazuy’s Models. Findings SCEIs in India do not significantly differ in their total risks and returns compared to their conventional counterparts. While their risk is lower in the monthly and quarterly investment horizons, their Jensen’s Alphas are positive only in the annual investment horizons. These findings hold, when market volatility is low. Market timing wipes out the superior returns that exist due to stock selection in SCEIs. Research limitations/implications Being Sharīʿah-compliant is beneficial only in longer investment horizons. Asset selection, not co-movement with the market, is key to excess returns to compensate for risks due to inadequate diversification. However, only cautious market timing can conserve them. Practical implications Though investors are not better-off in choosing ethical investments, they are not worse-off either. Being Sharīʿah-compliant is rewarding during less volatile markets. Originality/value This paper extends international literature on SCEIs, with evidence on the impact of investment horizon and market volatility on their returns and risks. Further, this paper is also a comprehensive analysis of Indian SCEIs, broadening the empirical evidence on a significant, non-Islamic and emerging market.

Development and Validation of an Islamic Investor’s Sentiment Scale for Stock Market Investment

“…Shariah-compliant finance has drawn a lot of attention recently and is affecting the Indian financial sector more and more. Therefore, it is essential to analyze Indian Muslims’ equities market investing behavior in light of Shariah principles in light of the establishment of Shariah-based BSE and NSE Islamic indexes (Irfan, 2021; Nihar & Modekurti, 2021; Sahu et al, 2009).…”